Buffett's Berkshire Is Going Long on Homebuilders. Here's Why I'm Moving in the Opposite Direction

Nearly five years after the pandemic ended, the housing market remains in a rut.

A combination of factors, including the lock-in effect from low rates during the pandemic, mortgage rates now above 7%, stubborn inflation, and rising home prices, has kept the housing market frozen.

Existing annual home sales have hovered around 4 million since the post-pandemic cooldown in 2022, well below the 5.5 million they were averaging before the pandemic. By comparison, even during the housing crash during the Great Recession, existing home sales were only briefly under 4 million, and that was when the U.S. population was significantly smaller.

Investors who have bet on homebuilders, thinking they would alleviate the housing shortage and create inventory while most homeowners are holding on to rock-bottom mortgage rates, have mostly been disappointed, as the sector has been flat over the last few years, even as the broader market has soared.

However, that underperformance hasn't deterred Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), which has gone on a shopping spree in the sector lately.

While Warren Buffett is no longer guiding the company's investments, Buffett was a fan of the homebuilding industry as Berkshire acquired Clayton Homes back in 2003.

Image source: Getty Images.

What Berkshire is doing in the homebuilding industry

Following recent moves by new CEO Greg Abel, Berkshire Hathaway is now the nation's 4th-largest homebuilder.

Those moves include the acquisition of Taylor Morrison, an Arizona-based homebuilder, for $6.8 billion. Berkshire said it would combine Taylor Morrison with Clayton. It also acquired South Carolina homebuilder McGuinn in July.

In addition to that acquisition, Berkshire has aggressively accumulated stakes in major homebuilders like Lennar, NVR, and D.R. Horton. It now owns 11% of Lennar after nearly doubling its stake in it during the third quarter, while it holds small stakes in NVR and D.R. Horton.

Those investments seem to be classic Berkshire in a number of ways. While the headwinds in the sector are intensifying and the recent stock performance has been underwhelming, homebuilding is the kind of timeless industry that Warren Buffett favored, and the valuations in many of these stocks look appealing if you believe that demand will bounce back.

Abel told CNBC in September, "When we looked at housing and housing specifically in North America, we were taking a very long-term view that the American dream will continue to exist, and five years and 10 years from now, this will be a very strong asset for Berkshire.”

Why I sold my homebuilder ETF

After holding shares of State Street SPDR S&P Homebuilders ETF (NYSEMKT:XHB) for more than two years and taking a loss, I sold some of the ETF, and will likely sell the rest soon.

I thought that homebuilders were well-positioned to take advantage of an estimated shortage of 4 million homes in the country, but homebuilders haven't capitalized on that gap the way I expected. Instead, high mortgage rates, rising building costs, labor shortages from increased immigration enforcement, and tariffs are making even new homes difficult for Americans to afford and have pressured the homebuilders, who have resorted to price cuts to move inventory.

There's a lot of leverage in the homebuilding industry, and when things are going well, these companies can generate high margins. However, in the current environment, that has proven difficult, and I think that is unlikely to change in the foreseeable future.

Fed Chair Kevin Warsh has promised to tame inflation, a sign that the Fed is likely to raise interest rates, and yields have already spiked in anticipation of Fed rate hikes and other factors, including the debt-fueled AI infrastructure build-out.

It could be years before mortgage rates cool to a level where they support increased housing demand. Abel may be willing to wait that long, but I have a different time horizon and I'd prefer to invest in stocks that make their own success rather than waiting for macroeconomic conditions to change.

Even as the bull market is nearing its fifth year, there are plenty of appealing opportunities outside of the homebuilding sector, and mortgage rates show no sign of coming down anytime soon.

Jeremy Bowman has positions in SPDR Series Trust - State Street SPDR S&P Homebuilders ETF. The Motley Fool has positions in and recommends Berkshire Hathaway, D.R. Horton, Lennar, and NVR. The Motley Fool has a disclosure policy.